The council’s annual report, in which it has a constitutional responsibility to comment on the co-operative’s financial performance, showed 86.8% of the country’s farms supplied the co-op.
That was down from 88.3% last season and well short of its 2014 target of 88.2%.
The council based its report on Fonterra’s statement of intentions, a list of key performance indicators and their targets provided to the council by Fonterra’s board at the beginning of each season.
The council receives updates quarterly but reports annually.
This year two new measures were added, in line with the co-op’s strategy.
The percentage of NZ milksolids collected by the co-op was one of those measures, as part of the retain and grow strategy.
While the report recorded the drop, no comment was included other than that it was an important metric to monitor, because part of the reason for the Fonterra’s formation was to provide critical mass to compete in the global marketplace. It also reflected Fonterra’s ability to retain supply and stay abreast of changing farmer needs.
The other new measure, dubbed “turning the wheel”, was a measure of the board’s progress against the co-op’s strategy to move more milk into higher value products.
It included measures such as the amount of milk supplied under the Dairy Industry Restructuring Act to other processors as well as volumes sold into paediatrics, food service and consumer-ready products, with the intention of decreasing DIRA milk and increasing the other volumes.
The botulinum scare meant a decrease in paediatric sales while food service increased and consumer product sales remained flat.
Under the turning the wheel intentions, long-term sales agreements declined rather than remaining flat, which was a positive in last season’s unusual global pricing situation.
Spot commodity and ingredients sales were also intended to reduce but increased because of world pricing, again a positive outcome for the co-op. It was similar story for GlobalDairyTrade where the intention was to reduce volumes. The reverse occurred but to the benefit of farmers because of rapidly rising commodity prices early in the season.
The council gave Fonterra’s board and management a big tick when it came to the way it managed the unprecedented disparity between commodity prices that inform the milk price and those that have an impact on profit, especially in the face of record milk volumes.
It supported Fonterra’s departure from the milk price manual, recognising the unusual disparity, and reiterated its support of the manual in the long term as well as the calculations and assumptions behind it.
The council’s co-operative relations committee has been working with Fonterra’s board and management on the guaranteed milk price and the new capacity adjustment charge.
Concerns expressed to the council about the capacity adjustment charge included worries that it mixed a capital and milk pricing signal which could in turn lead to misinterpretation and encourage farmers to flatten their milk curve.
It also created greater complexity for some farmers who had differing arrangements with sharemilkers behind the farmgate in terms of how they recognised the new method of making the adjustment.
The committee reported that, from the council’s perspective, management’s consultation could have been better, given the council didn’t know about the changes until after they’d been implemented.
The guaranteed milk price, while a move to provide for the changing needs of shareholders, also had the potential to create problems with different payments within the co-op.
In summary, the council said, last season was a tough trading year and global volatility was once again the core driver of performance which meant some KPI targets were not reached.
It gave the company a bouquet for driving operating expenses down by 8% and observed a strong focus on spending money in the right places to drive growth throughout the business.
The development of future value to smooth out commodity cycles was a strategy the shareholders were right behind.
